As Losses Widen, Groupon Struggles to Redefine Itself

Groupon said Tuesday that losses widened in the second quarter as marketing and sales costs jumped but gross profit remained flat. The culprit, a far less profitable ecommerce business than anticipated, accounted for every dollar of the company’s top-line growth as it struggles to find new footing for its sluggish local deals business.

The news sent shares of the company’s stock down nearly 16% in after-hours trading.

In the second quarter, Groupon lost nearly $20 million dollars, almost four times the loss its posted a year ago. The company said a large portion of those losses came from unexpected expenses related to the acquisition of Tmon, a Korean deals site which Groupon purchased for from LivingSocial late last year.

Eric Lefkofsky, chief executive at Groupon, remained adamant that the company was on track to turn its local business in North America around by the end of the year, but admitted that adoption of the company’s newest products have lagged.

“We are a business in transformation— and this is a market transformation,” Lefkofsky, who took the helm after the company fired its founder Andrew Mason last year, told investors on an earnings call Tuesday. “We created a product in daily deals which was cloned by every major technology company in the world, and we have done fairly well to react.”

Consumers have greeted Lefkofsky’s plan for revitalizing the deals company with a muted reception. The vision, to shift the company from pushing discounts in emails to building a searchable marketplace, has only seen marginal adoption, with the so-called “pull” offers accounting for only 10% of all transactions. “The adoption [of the marketplace] has not been as strong as we would like,” Lefkofsky added.

The company’s deals business in North America began to hit headwinds in late 2012 as merchants cooled on daily deals. The total gross billings increased for the third quarter in a row this spring. But the local operations in North America still saw revenue decrease from the previous quarter as the company took a smaller portion of the transactions and offered large discounts to drive adoption of its marketplace.

Lefkofsky remained confident that the decreased take rate and “discounts” would reinvigorate growth, and allow the company to keep its promise to investors of 10% growth in the local business in North America by the end of the year. The company said Tuesday that it planned to begin to pass some of the “discounts” onto merchants in an effort to lessen the impact on its bottom line.

The company’s long-term plan to revitalize the deals business centers on the recent rollout of Gnome, a tablet-based point-of-sale system. The idea is that the firm can automate the deal selection process and redemption process once it’s tied into the system that controls a merchant’s operations. Think of it as yield management software that allows a merchant to programmatically drive consumers to a location based on current volume.

However, the company may find itself squeezed between other layers of an increasingly complex local technology stack. Like a number of other players, the company’s strategy relies on an environment in which it has relative dominance over its consumer and merchant networks. But the pace of innovation has exploded in recent years, and the market now offers a host of feasible alternatives, often structured horizontally rather than vertically. The idea that a consumer or merchant will rely exclusively on a single service to find or buy goods locally is a relic of an analog market and the early days of the modern one.

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